Mortgage interest: Wrong year to expect major tax change

April 15 is right around the corner. Put-it-off taxpayers have become edgy about the number of days remaining to hit the deadline, others have already resigned to an October extension while analysts handicap the chances of Congress making changes to near and dear deductions.

Three years ago, a team of Washington, D.C., housing reporters and industry analysts predicted there was a 75 percent chance that Congress would reduce the mortgage interest deduction (MID). The MID has been closely guarded by realtors and builders as one of the key incentives and reasons for consumers to buy a home.

While the perception of the MID is monumental, the actual impact of MID is not as far reaching as most assume. Only 42 percent of households currently benefit from the MID. Only 67 percent of households own a home, and, of those owners, fewer than 63 percent pay enough interest to justify itemizing deductions. In fact, 29 percent of homeowners, many of whom are retired, don't even have a mortgage.

This year's most popular pitch in federal tax code changes comes from Dave Camp (R-MI), chairman of the House Ways and Means Committee. According to the Tax Foundation, a tax policy research organization, Camp set out to help simplify the code while maintaining revenue neutrality. His plan includes reducing the mortgage interest deduction on new mortgages from $1 million to $500,000 over four years. Nothing was proposed on curtailing the MID on second homes or lines of credit.

Apparently, the Camp plan has generated little interest and the chance the MID would be reduced doesn't even come close to the 75 percent predicted three years ago. More importantly, 2014 is a Congressional election year. And, historically, no major tax bill has passed in an even numbered year.

"I would say it has little chance of coming up for a vote in the House, much less in the Senate," said William McBride, the Tax Foundation's chief economist. "Democrats have not put forth this idea as a revenue raiser."

The mortgage-interest deduction is not a dollar-for-dollar tax deduction; it reduces taxable income. Before 1987, mortgage interest on all residences could be deducted without limit. Since then, consumers with more than two residences are required to choose two "qualified" residences where mortgage interest could be deducted, but the selected residences are allowed to be juggled into the "qualified" category from year to year.

Sheila Crowley, president of the National Low Income Housing Coalition (NLIHC), constantly seeks creative ways to increase the number of rental units in this country and create new avenues to fund basic shelter. For years, she's targeted incentives for high-cost homes, especially second residences.

"Second homes would have to be classified as a luxury,'' Crowley said. "I mean, does anybody really need one? So, why not have a surtax on them? Can you image how quickly the home builders would move to get that notion turned around?"

Some accountants have jokingly referred to the concept of deducting interest on two homes as the "Congressman's Rule" because some of our lawmakers have a residence in the nation's capital and another in their home state. Accountants said that if the second-home mortgage interest deduction is ever threatened, taxpayers could choose to rent out their homes for a period greater than their personal use and change the second home's status to an investment property.

"If you redirected the mortgage interest deduction from homes over $300,000, you could end homelessness tomorrow,'' Crowley said. "How much of a home do people really need and to what extent should the government go to subsidize that home?

It's often stated in flat-tax initiatives that eliminating mortgage interest would level the playing field for average families. In reality, a homeowner with a $250,000 mortgage with a 5 percent interest rate in the 25 percent tax bracket would probably pay $1,500-$1,900 more in federal income tax if the mortgage interest deduction were eliminated. That's because a taxpayer would not itemize other deductions as well and they would simply take the standard deduction.

"People believe the mortgage interest deduction is their birthright," Crowley said. "It's an untouchable - just like Social Security. Suggest getting rid of the mortgage interest deduction and you'd better leave the room.''

Many of people in the room, however, may not even take the deduction.

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